2015 (7) TMI 91 - SC - Income Tax

Taxability of Amounts paid by the ONGC to the non-resident assessees /foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil - Fees for technical services under Section 44D read with Explanation 2 to Section 9(1)(vii) OR payments be taxable on a presumptive basis under Section 44BB - Held that - Pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal. - Decided in favour of assessee.

Issues Involved:
- Whether the amounts paid by ONGC to non-resident assessees/foreign companies for providing various services in connection with prospecting, extraction, or production of mineral oil are chargeable to tax as "fees for technical services" under Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income Tax Act or taxable on a presumptive basis under Section 44BB of the Act.

Detailed Analysis:

1. Background and Primary Issue:
The appellant, ONGC, was assessed on behalf of various foreign companies under agreements for services related to prospecting, extraction, or production of mineral oils. The primary authority assessed these under Section 44D, while the Appellate Commissioner and the Income Tax Appellate Tribunal favored Section 44BB. The High Court reversed the latter's view, leading to the present appeals.

2. Agreement Details and High Court's Analysis:
The High Court analyzed an agreement between ONGC and a foreign company, Foramer France, which involved providing supervisory staff for drilling operations. Despite acknowledging the operational role of the personnel, the High Court concluded that the payments were for technical services, thus taxable under Section 44D. This decision was uniformly applied to similar cases.

3. Relevant Provisions:
- Section 44BB: Pertains to non-residents providing services or facilities in connection with mineral oil exploration, with profits calculated at 10% of the aggregate amounts paid.
- Section 44D: Applies to foreign companies receiving income by way of royalties or technical fees, with no deductions allowed for expenses.
- Explanation 2 to Section 9(1)(vii): Defines "fees for technical services" but excludes payments for mining or like projects.

4. Interpretation of "Fees for Technical Services":
The court emphasized that "fees for technical services" under Section 44D excludes payments for mining projects, which includes oil drilling operations. This interpretation aligns with the CBDT Circular No. 1862, which clarified that services related to oil exploration are considered mining operations, thus falling under Section 44BB.

5. Attorney General's Opinion and CBDT Circular:
The Attorney General's opinion, accepted by the CBDT, stated that oil exploration services are mining operations. Consequently, payments for such services are taxable under Section 44BB, not Section 44D.

6. Examination of Contracts:
The court reviewed various contracts, categorizing them based on the nature of services provided, such as drilling, training, consultancy, and equipment maintenance. It concluded that these services are directly linked to the prospecting, extraction, or production of mineral oil, thus falling under Section 44BB.

7. Legal Precedents and Statutory Interpretation:
The court referenced the Mines Act, 1952, and the Oil Fields (Regulation and Development) Act, 1948, to establish that drilling operations are mining activities. It also considered the constitutional entries defining mineral oils and mining operations.

8. Conclusion and Judgment:
The court held that the dominant purpose of the agreements was for prospecting, extraction, or production of mineral oils. Therefore, payments under these contracts should be assessed under Section 44BB. The appeals were allowed, setting aside the High Court's orders and restoring the Appellate Commissioner's and Tribunal's views.

Final Judgment:
All appeals were allowed with no order as to the costs, affirming that the payments made by ONGC to foreign companies for services related to oil exploration are taxable under Section 44BB of the Income Tax Act.

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